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October 22, 2013

U.S.-Only Investing Is ‘Missing Out on Something’

While he says his clients do have a U.S. bias, which he honors up to a point, David L. Blain of D.L. Blain & Co. Ltd. makes sure that the rest of the world is well represented in their investments.

Made up of about 90% ETFs but with “a couple of mutual funds” having been recently added to their portfolios, the investments Blain chooses for his clients give them the benefit of a global view. While exposures aren’t calculated strictly on their share of the world market, Blain says that portfolios are a little overweighted in the U.S. That’s a concession to his clients, whom he says “are generally more accustomed to seeing the portfolio move up and down like the U.S. does.”

That said, it’s not all that much of an overweight for domestic stocks. Blain said, “We invest in every region of the world, and we start off with the market capitalization of that particular area. For example … at the end of September, emerging markets were 10.67% of world stocks. The U.S. was 49.46%, and developed markets were 39.87%.”

Subtracting the U.S. from the world market total gives them their starting point, “then we decide how much to overweight or underweight.”

Currently U.S. stocks make up about 60% of client portfolios instead of that 49.46%. And that’s about the only concession he makes to clients who might otherwise go overboard in overweighting one country or another, or one stock or another—something he’s seen advisors do as well if they don’t consider the size of that country’s economy in relation to the rest of the world, and in particular to the U.S.

“Let’s take China, for example. People may want to overweight China, but it’s only 2% of the whole world’s stock market capitalization,” Blane said. If either an individual or an advisor overweights China heavily, they could be introducing a risk all out of proportion to the potential for return, he added.

Blain does a bit of overweighting himself, but it’s carefully considered. “We’re currently overweighting Europe, but on a consistent basis we generally only overweight the U.S. because this is where we live.”

International investing has brought some handsome dividends, although “it depends on the time frame how much better [other countries and regions have done],” he said. “Emerging markets did extremely well in the 2000s, until the financial crisis. Coming out of it, the U.S. has done extremely well, and just recently we’re starting to see some good signs of life out of Europe, doing better than other places. For example, Europe over the past six months returned about 15% vs. 5% for the U.S. It’s too early to tell if that’s going to continue, but certainly on a shorter-term basis it looks as if Europe is having some recovery.”

Europe and emerging markets are not the only areas in which Blain’s portfolios have done well. “The first part of this year and the latter part of 2012, Japan was doing extremely well. We have exposure to all those areas,” according to Blain.

Of course, unbridled enthusiasm isn’t the only thing he guards against; the other is client concern about why he’s choosing to invest internationally in the first place. “We run into that sometimes, I think more so in the past couple of years with concerns over Europe. People [have been] concerned about it, about exposure to other countries.”

But on the whole that’s not an issue. “With our clients, our target market is what we call delegators. They may be reading about [problems in] Europe and wondering why we’re still investing in it. Although they may have some concerns, once we explain [our reasoning], they’re fine with it [and they’re content to delegate investing responsibility to us],” Blane said.

Blain champions international investing, having used it since he started in 1999. “My opinion is if they’re not using it, they’re missing out on something. On the other side [of the issue], the argument I hear is, if you invest in Coke, the majority of their profits come from overseas, so American companies are just as good. But currency fluctuations and the political atmosphere [in other countries] create different opportunity sets than we have in the U.S. That’s my opinion.”